89% of women failed retirement literacy quiz: Study

When it comes to retirement literacy, most Americans get a failing grade. According to newly released research by The American College of Financial Services, women fare worse than men, with 89% of female participants flunking a 38-question quiz, compared to 72% of men.

The 2020 Retirement Income Literacy Survey tested consumers’ knowledge of retirement income concepts and focused on the drawdown phase of retirement planning. The results are based on online interviews with 1,500 Americans ages 50 to 75 with at least $100,000 of household assets.

To be fair, parts of the quiz may be challenging to anyone outside of the financial planning profession, with questions ranging from typical investment returns and safe withdrawal rates to Medicare and Social Security rules. Try it yourself and see how you do.

It's not all bad news for women. Unlike men, who are notoriously reluctant to ask for directions when lost, many women know what they don’t know, and the survey found that more women are willing to seek help creating a financial road map.

In addition, nine out of 10 older women with partners or spouses said they equally share or lead financial decision-making for their households, and female retirees and near-retirees indicated they are more willing to seek financial advice than men.

“The study shows this is a clear opportunity for financial professionals to expand their business by providing guidance to women to build financial strategies and close the planning gap,” The American College said in statement releasing the survey results.

Women cited retirement income planning, guaranteed lifetime income, and health and long-term care among their greatest areas of concern. Only 20% of female respondents said they are highly knowledgeable about Social Security and just 10% said they understand annuities.

“Women are concerned about running out of money in retirement and more than half want their advisers to educate them on strategies to protect against investment risk and on how to prudently spend each year to ensure they don’t outlive their assets,” said Timi Jorgensen, director of financial literacy at the American College.

A separate study from the Center for Retirement Research at Boston College looked at the best way to annuitize defined-contribution assets as a method of ensuring a higher level of lifetime income while reducing the likelihood that people will outlive their resources and alleviating some of the anxiety of post-retirement investing.

Authors Alicia Munnell, Gal Wettstein and Wenliang Hou looked at three possible solutions: Workers could use a portion of their 401(k) and IRA assets to purchase an immediate annuity that pays a fixed amount through their lives, typically starting at age 65; they could purchase an advanced life deferred annuity that requires a smaller share of accumulated assets and begins at a later age like 85; or they could delay claiming Social Security, which is essentially like purchasing an inflation-indexed annuity.

But the researchers conceded that none of these three options is commonly used. Very few workers choose to purchase immediate or deferred annuities and few retirees appear to be deferring claiming in order to receive the maximum annuity income from Social Security. Most people simply retire earlier and claim benefits immediately.

The authors found that for most middle- and upper-income workers, delaying Social Security until it is worth more is more attractive than buying a commercial annuity, particularly because Social Security benefits are indexed for inflation and the 8% per year increase in benefits between full retirement age and age 70 is especially valuable in the current low-interest-rate environment.

They proposed that 401(k) plans could introduce a default option that would use 401(k) assets to pay retiring individuals who are 60 to 69 an amount equal to their Social Security full retirement age amount. If account assets were exhausted, payments would stop. Providing a temporary stream of income to replace an individual’s Social Security benefit would break the link between retiring and claiming benefits, they wrote. “Most households would gain from delaying claiming their Social Security benefit.”

[More: Reframing Social Security claiming decisions]

Using 2018 data from the Social Security Administration, the authors calculated that 35% of women and 40% of men claimed benefits as soon as possible at age 62; 23% of men and 16% of women waited until their full retirement age of 66 to claim; and only 5% of men and 7% of women waited until age 70 to collect their maximum benefit.

For someone whose full retirement age is 66, the difference between claiming Social Security at 70 rather than 62 results in a 76% increase in monthly benefits for life.

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